Harrisburg a cautionary tale for bond investors and mayors

The SEC slapped Harrisburg, PA, with a cease and desist order Monday, saying the city’s government for allegedly violating securities law.

Regulators found that city officials failed to come clean about the dire debt trouble at its Resource Recovery Facility and its general financial health while issuing bonds. This all happened in 2009 and since then , Harrisburg has been placed in receivership. Yup, PA’s capital is in bankruptcy.

At any event, the SEC pointed out that the Mayor at the time of the problem failed to properly disclose the scope of the problem and in fact the city misled investors on several occasions. One of the major issues that haunted Harrisburg was having a debt level eight times expected revenue. In the end, the city missed about $13.9 million in bond payments.

The SEC also criticized the city on how it handled its budget, knowing the Authority running the Resource Recovery Facility was in trouble. Here’s an excerpt from the SEC’s findings:

On November 25, 2008, the Harrisburg administration submitted a proposed 2009
Budget to City Council, which was approved on December 22, 2008 (”2009 Budget”). The 2009
Budget included $63 million of general fund expenditures. At the time, Harrisburg’s 2009 Budget
and its accompanying transmittal letter were accessible on Harrisburg’s website. By the time the
2009 Budget was passed, Harrisburg was aware of the Authority’s projected budget deficits and
that Dauphin County was challenging the rate increase. As a result, the Authority was unlikely to
have sufficient revenues to pay its 2009 debt service obligations. Harrisburg’s 2009 Budget, as
adopted, did not include funds for debt guarantee payments for the RRF, raising questions as to
whether it would fulfill its obligations under those guarantees. Nevertheless, at the beginning of
the year, Harrisburg administration officials informally set aside $2.1 million of its surplus reserves
in anticipation of potentially having to make those guarantee payments.

The SEC issued guidelines to municipalities regarding their obligations under the Securities Act. It’ll be interesting to see how this case affects future disclosures among Connecticut and municipalities around the country. The Mines fully expects investors will be digging even deeper into muni financials after this.

Rob Varnon